US airlines’ profits overshadowed by worldwide security concerns

Rotation

Celebrations over the last week about US airlines’ robust second quarter profits were quickly overshadowed as carriers found themselves in the center of war zones, and fielding numerous queries about their methodology for determining whether a particular region is safe for flights.

Just before the US airline earnings season began, Malaysia Airlines Flight 17 crashed in eastern Ukraine. Mounting evidence shows that the Boeing 777 was hit by a Russian-made surface to air missile.

Five days after the MH17 tragedy occurred the US FAA issued a NOTAM (notice to airman) banning flights to Ben Gurion Tel Aviv airport after a rocket landed a mile from the facility.

As the FAA opted to prohibit flights to Tel Aviv, Delta reported a 17% increase in profits year-on-year to $801 million as its return on invested capital reached 18.2% for the trailing 12 months ending in June 2014. American recorded a $864 million profit and revealed plans to issue its first dividend to shareholders since 1980. United increased its second quarter profit by 68% year-on-year during the second quarter to $789 million. Both American and United also announced plans for $1 billion in share buy-backs as part of long-awaited shareholder returns while Delta returned roughly $550 million to shareholders by mid-July.

But executives that aimed to steer the discussions over how unprecedented it is that all the US major airlines are delivering shareholder returns found themselves explaining how they approach operations in volatile regions.

Delta CEO Richard Anderson remarked that the airline makes its decisions independent of the FAA, “because a Hamas missile lands a mile from the airport [Ben Gurion] on the north side where we approach on final in a 747”. Anderson said Delta appreciated the “advising concern” and the intelligence it receives, “but we have a duty and obligation above and beyond that to independently make the right decision to our employees and passengers”.

After the ban was lifted at midnight on Wednesday, American, Delta and United all opted to resume service to Tel Aviv. US Airways operates from Philadelphia Tel Aviv, Delta offers service from JFK to Ben Gurion and United flies to Israel’s largest airport from its Newark hub. (American and US Airways merged in December 2013 and are in the process of obtaining a single operating certificate.)

American was queried over any potential discussions it held with its US airline peers about resuming service to Israel. Airline CEO Doug Parker explained each company makes those decisions independently; but “it is not surprising all the airlines came to the same conclusion [to resume flights]”.

The airline business is competitive, said Parker, “but we don’t compete on safety. We wouldn’t put our customers and employees at risk.” United CEO Jeff Smisek made a similar declaration: “We don’t fly missions that we don’t have confidence are safe.”

American chief operating officer Robert Isom offered a broader perspective, explaining the airline constantly monitors numerous types of threats, “whether civil unrest, thunderstorms or a FAA mandate. We have our own internal security group, external advisors and a government relations team that stays in close contact with the [US] State Department and FAA.” American takes that information and carries out an analysis to determine “what is best”, said Isom.

If airline executives found themselves unexpectedly discussing their security protocols during 2Q2014 earnings discussions at least their stocks remained somewhat steady. United on Friday July 25 closed up 4% from the day prior to nearly $47 a share, while Delta’s shares remained roughly flat at $38. American notched down 1% to $41.68.

But even if airline stocks did not take a hit from the recent intersecting of aviation and war zones, passengers are still likely skittish even as Anderson trumpets Delta’s “very sophisticated capability and methodology to manage these kinds of risks, whether it is this or a volcano or a hurricane. That’s what we do well.”

Comments Off on US airlines’ profits overshadowed by worldwide security concerns - Leave comment